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2023 ReportAnnual Report 2016 Surgeon-led solutions for minimally invasive surgery About Us Surgical Innovations Group Plc specialises in the design and manufacture of creative solutions for use in minimally invasive surgery (MIS) and industrial markets. Our pioneering products are developed in close collaboration with international surgeons to ensure they meet patients’ needs and remain at the forefront of innovation. 2016 Financial Highlights Bank Financial Leases Covertible Load 2 1 0 -1 -2 -3 -4 2014 2015 2016 7 6 5 4 3 2 1 0 2015 2016 Precision Engineering OEM SI Brand Net Cash Position £0.72m SI Branded Revenue Growth (£m) +11% 6.09 5.47 2015 2016 Revenues £6.09m Target Range 45 40 35 30 25 20 15 10 5 0 15H1 15H2 16H1 16H2 Gross Margin 34% 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Target Range 2014 2015 2016 Net Inventory £1.5m Contents Strategic Report Chairman’s Statement Strategy report and Operating & Financial review Director’s Report Financial Statements Independent auditor’s report Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated balance sheet Consolidated cash flow statement Notes to the consolidated financial statements Company balance sheet Company statement of changes in equity Notes to the Company financial statements Shareholder information Advisers 1-2 3-5 6-9 10 11 12 13 14 15-34 35 36 37-40 41 More information can be found at www.sigroupplc.com Strategic Report Nigel Rogers Executive Chairman Chairman’s Statement Financial Overview The Group is pleased to report strong results in 2016, with profitability ahead of market year-end expectations. The Group returned to profitability at the pre-tax level and increased cash generation, resulting in a positive cash position at the year-end. Robust top line growth has been achieved by leveraging the strong relationships with distributors, as well as fostering associations in new territories. Gross margins improved considerably in the year, following a strong second half in 2015.This resulted from a return to normal manufacturing output as stock levels regularised. Cost control has been a key focus, enabling the business to deliver improved profitability and cash generation during the year. In the final quarter of the year, the bank debt put in place at the end of 2014 was repaid. This was considerably earlier than the November 2017 due date. The loan note holders also converted the notes into shares during this period. The strong cash generation of the Group meant that the business closed the financial year with net cash of £0.72m (2015: net debt of £2.26m). Brand identity, innovation and global reach The SI Brand was further enhanced in the year by the much-anticipated launch of the YelloportTM Elite range, a new port access system utilising universal seal technology giving significantly improved performance for surgeons and theatre staff. The Group remains focused on innovation and development of its portfolio of products, brand recognition and the identification of as yet unmet clinical needs in order to drive the product roadmap effectively. The distribution network has continued to expand in 2016 with the addition of five new territories. There are more potential distributors in the pipeline who are currently going through the required regulatory and compliance processes in order to join our distribution network in the coming year. 1 Revenue increased by 11% to £6.09m (2015: £5.47m), with growth in branded product sales up by 11% to £4.66m (2015: £4.18m) and Precision Engineering also generating significantly increased activity with revenue of £0.21m (2015: £0.05m). Reported gross margins have continued to show substantial improvement as a result of operational gearing and foreign exchange gains. Adjusted EBITDA for the full year (being profit before taking account of exceptional costs, interest, depreciation, amortisation and taxation) amounted to £1.41m, showing strong growth against £0.24m in 2015. The net operating profit for the year was £0.47m (2015: loss of £1.98m). There were no exceptional costs in the year (2015: £1.29m). The net profit and total comprehensive income for the year amounted to £0.72m (2015: loss of £2.03m), after a taxation credit of £0.44m (2015: £0.09m), resulting in earnings per share of 0.15p (2015: loss of 0.42p). At the end of the year, the Group had returned to a positive cash position of £0.72m (2015: net indebtedness of £2.26m).The Group had available cash resources of £0.78m with additional headroom of £1.3m of unused facilities, and was in compliance with all financial covenants. People SI has continued to invest in our people and their training. Amongst other initiatives we have undertaken in 2016 is a year-long programme of lean manufacturing training for all employees which is already delivering improvements throughout the business. Employee numbers have increased, predominantly strengthening manufacturing, assembly and production engineering which all reflect the increased manufacturing output. Surgical Innovations Group PLC Annual Report and Accounts 2016 Current Trading Outlook Trading results for the first two months of the current year have shown further increases in revenue and profitability compared with the corresponding period last year. The overall market for minimally invasive surgical products is cost competitive, however it is also forecast to grow at an annual rate of 6.5% in the medium term. We continue to seek opportunities to exceed this rate of revenue growth by increased market share through product range development, high levels of customer service and opening new sales territories. We also continue to evaluate further opportunities to enhance our product range and market penetration by forging strategic partnerships, including potential acquisition of carefully selected complementary businesses. Nigel Rogers Executive Chairman 14 March 2017 Financial Overview People Chairman’s Statement 2 Surgical Innovations Group PLC Annual Report and Accounts 2016 Strategy Whilst the Group’s core strategy remains the sale of branded laparoscopic instrumentation, we have recently seen a shift away from the sole development and manufacture of these devices in-house and reached out to selected partners who have demonstrated the ability to work with SI to offer novel solutions in areas of instrumentation where SI has not traditionally operated. One of the first products to come out of this new direction was launched in early 2017. This has enabled SI to begin offering a range of ligation products to complement the existing product portfolio. We are conscious of the fact that the reputation of the Group is built upon our ability to offer surgeons instruments of high quality at reasonable prices. We are now in an era when there is increasing pressure on the costs of healthcare leading to ever more careful scrutiny of prices by purchasing authorities worldwide. Our strategy is to concentrate on the development or acquisition of instruments that surgeons tell us that they need and to introduce efficiency and innovation into the manufacturing process to enable us to provide them at competitive prices. In November 2016, the Group completed the acquisition of the laparoscopic instruments business and related assets of Surgical Dynamics Limited. This transaction brought not only new products to the SI portfolio but also specialist production processes including metal injection moulding of device components. The assets have now been transferred into the SI site and machining trials are underway. The Group has continued to foster excellent relationships with our distribution network, engaging our partners through involvement in product development, supporting them in end user trials and gathering with them at several conferences and exhibitions throughout the year. This included a new product launch conference at the Medica trade show in Germany in the last quarter of the 2016 which garnered strong positive feedback on both the new products emerging from SI as well as our performance as a partner. The Group recognises the value in this feedback and relationship and will continue to exceed our customers’ expectations in 2017. The Group continues to work closely with strategic partnerships on OEM projects which challenge our Design and Development teams and complement the core competencies that the Group demonstrates. The greater emphasis placed on new product introduction culminated in the launch of the Yelloport® Elite range in the final quarter of 2016, this will be followed by further additions to this range in Q2 2017 as well as two more projects launching before the end of H1. The Group is excited to be able to offer these products to the market and remains committed to expanding the portfolio of products available further in 2017 and beyond. The Group has continued to deliver against a backdrop of a challenging economic climate, but by offering consistently high customer service levels, excellent products and being adaptable in the face of market and customer feedback, the Board believes the business is well placed to continue to deliver value to the shareholder base. 3 Surgical Innovations Group PLC Annual Report and Accounts 2016 Operating and Financial Review Melanie Ross Chief Operating Officer and Chief Financial Officer Overview Group revenues increased by 11% to £6.09m (2015: £5.47m) demonstrating the ongoing focus of the organisation in improving and expanding its distributor relationships. £m 2016 2015 %Change SI Brand OEM PE Total 4.66 1.22 0.21 6.09 4.18 1.24 0.05 5.47 +11% -2% +320% +11% SI Brand SI Brand sales rose by 11 % to £4.66m (2015: £4.18m) with the strongest growth areas being sales to the US and Rest of the World. Strong growth in the US has come both from the success of the additional distributor engaged at the beginning of the fiscal year, the continued efforts of the incumbent distributor and from gains in exchange as the US dollar moved more favorably against the Sterling. OEM OEM sales remained broadly in line with the prior year at £1.22m (2015: £1.24m). Although underlying sales from continuing relationships continue to grow strongly, these were offset by agreements which ended by mutual consent in 2015 and were not repeated in 2016. Although impacting the overall turnover of the OEM business negatively in the period, the conclusion of these agreements delivered an margin uplift as the non-repeated sales were low or no margin business. Precision Engineering The Group undertook further precision engineering projects in the period adding £0.21m to turnover (2015: £0.05m). Revenue from this segment is unpredictable, but the Group remains interested in this field and continues to work with new and existing partners to identify innovative projects on which to collaborate. Gross Margin Gross margin improved significantly, reaching 33.8% (2015: 14.0%) overall in the year, but delivering 41% in the second half, demonstrating that the production was more in line with demand as the stock levels normalised somewhat in comparison to the over stocking in prior years. Operating Expenses Excluding exceptional items in the prior year, operating expenses increased to £1.59m (2015: £1.45m), resulting from an increase in headcount and annual performance related bonus costs. Adjusted EBITDA and operating loss The adjusted EBITDA is a key performance measure of the business. The Group uses this as a proxy for understanding the underlying performance of the Group. This measure also excludes the items that distort comparability. The Group achieved a positive adjusted EBITDA of £1.41m for 2016, against a comparable adjusted EBITDA (before exceptional items) of £0.24m in 2015. Operating profit for the year was £0.47m (2015: loss of £1.98m), reflecting the trade of the Group and there were no exceptional items in the year (2015: £1.29m). Finance costs Interest on bank and finance lease obligations for 2016 resulted in interest payable of £0.19m (2015: £0.15m). Due to the payback of the loan and the conversion of the loan notes in the final quarter of 2016, the finance costs going forward will be much reduced. Taxation The Group recorded a corporation tax credit of £0.44m (2015: £0.09m) and a deferred tax credit of £nil (2015: £nil). In overall terms the Group has substantial tax losses on which it continues to take a cautious view. Consequently the losses have not been recognised and result in an overall effective rate of tax of 157.7% credit (2015: 4.3% credit). During 2016 the Group submitted enhanced Research and Development claims in respect of 2014 and 2015, electing to exchange tax losses for cash refunds totalling £0.44m which were received in June and December 2016. 4 Surgical Innovations Group PLC Annual Report and Accounts 2016 Operating and Financial Review Cash flow, financing and net debt The Group generated cash from operations of £2.40m (2015: £1.58m) primarily as a result of the working capital movements described above. Cash used in investment was £0.78m (2015: £0.45m) resulting in a cash inflow before financing of £2.00m (2015: £1.06m). This inflow was utilised by the business to facilitate early repayment of the term loan put in place in 2014. This loan was originally due for repayment in November 2017, but the business was in a position to repay this debt early and so in conjunction with the bank, transitioned to a rolling credit facility of £1.30m to be drawn down as the business requires. None of this facility had been drawn down by the year-end. At 31 December 2016, total gross indebtedness was £0.05m (2015: £3.24m) and the Company had available cash resources of £0.78m (2015: £0.98m). Melanie Ross Chief Financial Officer 14 March 2017 Intangible and tangible assets Capitalised development costs at 31 December 2016 increased slightly to £1.47m (2015: £1.36m) reflecting the focus placed on new product development, whilst controlling those costs appropriately. Research and development expenditure continues to be incurred, and a portion has been capitalised in respect of specifically identifiable products amounting to £0.44m (2015: £0.27m). These products are due for launch in the current year. Capital expenditure on tangible assets continued to reflect a policy of required replacement only during the year at £0.16m (2015: £0.17m) and there are no major capex plans currently under consideration. In addition during the period the Group acquired certain trade and assets of Surgical Dynamics Limited for £0.36m, which included intangible assets of £0.23m being recognised. Working capital Working capital further reduced by £0.97m to £2.04m (2015: £3.01m). The continued focus on cash and rebalancing the business drove the stock reduction by a further 22% to £1.50m (2015: £1.92m), whilst current trade receivables reduced to £1.10m (2015: £1.30m), despite 11% growth in turnover. Trade creditors reduced to £0.34m (2015: £0.41m) as the business focused on reducing costs and harnessing its increased buying power to negotiate better terms as manufacturing activity increased. This is expected to increase in 2017 in line with the rise in spending on materials to support increased manufacturing activity as new products are brought online and additional stock holding is required, though not to the levels seen in previous years. 5 Surgical Innovations Group PLC Annual Report and Accounts 2016 Directors’ Report Charmaine Day Company Secretary The Directors present their annual report, together with the audited financial statements, for the year ended 31 December 2016. Principle Activities The Company is the holding Company of a Group whose principal activities in the year involved the design, development, manufacture and sale of devices for use in minimally invasive surgery (SI) and precision engineering markets (PE). The Group sells branded products through independent healthcare distributors across the world and own label products through original equipment manufacturer (OEM) relationships. Results and Dividends The Consolidated statement of comprehensive income for the year is set out on page 11. Given the results for the financial year, the Directors do not recommend the payment of a dividend. Directors The names of the current Directors, and of those who served during the year, were as follows: N F Rogers (Chair) D B Liversidge (resigned 20 January 2016) M J McMahon M Ross P Hardy (appointed 20 January 2016) A Taylor (appointed 20 January 2016) Directors’ interests The interests in the share capital of the Company of those Directors in office at the end of the year were as follows Ordinary shares of 1p each 31 December 2016 Beneficial 1 January 2016 Beneficial P Hardy M J McMahon N F Rogers M Ross A Taylor 3,561,474 18,171,396 3,471,317 605,714 672,906 - 17,618,511 1,605,714 605,714 - Details of Directors interests in respect of share options are set out on page 24. There were no other changes in Directors interests between the year end and 14 March 2017. Other than as disclosed in note 18, no Director has an interest in any material contract, other than contracts of service and employment, to which the Group was a party. Substantial shareholdings Other than the Directors’ own holdings, the Board has been notified that, as at 1 March 2017, the following shareholders on the Company’s share register held interests of 3% or more of the issued ordinary share capital of the Company: Getz Bros. & Co. (BVI) Inc. Mr C W N John Unicorn Asset Management Hargreaves Lansdown Asset Management TD Direct Investing Northern Trust Marlborough Number of shares (%) 81,496,696 (15.28%) 37,462,124 (7.00%) 26,645,116 (5.00%) 21,206,272 (3.98%) 19,661,740 (3.69%) 17,142,857 (3.21%) 16,000,000 (3.00%) Share issues As at the 31 December 2016 2,872,868 ordinary shares at 1p were issued over the course of the year in satisfaction of directors remunerations set out in note 4. 6 Surgical Innovations Group PLC Annual Report and Accounts 2016 Research and development The Group’s activities in this area have focused principally on the continuing development of innovative instruments for use in the field of MIS. Directors’ Report Employees The commitment and ability of our employees are key factors in achieving the Group’s objectives. Employment policies are based on the provision of appropriate training, whilst annual personal appraisals support skill and career development. The Board encourages management feedback at all levels to facilitate the development of the Group’s business. The Group seeks to keep its employees informed on all matters affecting them by regular management and departmental meetings. It is the Group’s policy to give full and fair consideration to all applications for employment from disabled persons having regard to their particular aptitudes and abilities and to encourage the training and career development of all personnel employed by the Group, including disabled persons. Should an employee become disabled, the Group would, where practicable, seek to continue the employment and arrange appropriate training. Corporate governance The Directors support the underlying principles of the UK Corporate Governance Code, notwithstanding that the Group is not required to comply with all of the Code’s recommendations. The Board recognises its overall responsibility for the Group’s systems of internal control and their effective operation and it has sought to comply with those provisions of the Code judged appropriate for the current size and nature of the Group, being the establishment of an Audit Committee, a Remuneration Committee and a Nominations Committee. Formally constituted Audit, Remuneration and Nominations committees, with membership comprising all Non- Executive Directors, continue to operate and are active in the conduct of internal financial control, executive performance and Board appointments respectively. Financial risk The Group’s activities expose it to a variety of financial risks as set out below: a) Financial risk: The principal financial risk exposure relates to exporting goods in US Dollars. Further quantitative analysis is provided in note 14 to the Consolidated financial statements. b) Credit risk: The Group is exposed to credit risk through offering extended credit terms to those customers operating in markets where extended payment terms are themselves taken by local government and state organisations. The Group is also exposed to credit risk through customer concentration. Both of these aspects of credit risk are managed through constant review and personal knowledge of the customer concerned. Payment plans are agreed and monitored in all such cases to minimise credit risk. c) Liquidity risk: The Group manages its liquidity needs by carefully monitoring all scheduled cash outflows. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis, as well as on the basis of a rolling 13 week projection. Longer-term needs are monitored as part of the Group’s regular rolling monthly re- forecasting process. Funding for long-term liquidity is secured by an adequate amount of committed credit both through working capital and asset finance facilities. d) Interest rate cash flow risk: The Group has both interest-bearing assets and interest-bearing liabilities. Interest- bearing assets include only cash and cash equivalents which are held on deposit at both fixed and floating rates. Interest-bearing liabilities include hire-purchase liabilities which are at fixed interest rates, and also bank and other borrowings which are at both fixed and floating rates of interest. 7 Surgical Innovations Group PLC Annual Report and Accounts 2016 Directors’ Report Principal risks and uncertainties The management of the business and the nature of the Group’s strategy are subject to a number of risks which the Directors seek to mitigate wherever possible. The principal risks are set out below. Issue Funding risk Risk and description The Group currently has a mixture of borrowings comprising a £1.30m rolling credit facility, and £0.05m of equipment finance liabilities. The Group remains dependent upon the support of these funders and there is a risk that failure in particular to meet covenants attaching to the rolling credit facility could have severe financial consequences for the Group. Mitigating actions Liquidity and covenant compliance is monitored carefully across varying time horizons to facilitate short term management and also strategic planning. This monitoring enables the management team to consider and to take appropriate actions within suitable time frames. Customer concentration The Group exports to over thirty countries and distributors around the world, but certain distributors are material to the financial performance and position of the Group. As disclosed in note 2 to the financial statements, one customer accounted for 20.3% of revenue in 2016 and the loss, failure or actions of this customer could have a severe impact on the Group. Foreign exchange risk Regulatory approval The Group’s functional currency is UK Sterling, however it receives significant export income in US Dollars. Whilst the Group makes some purchases in this currency, it does not create a natural hedge of the foreign exchange risk. Accordingly, the financial position and performance of the business is exposed to movements in US Dollar rates which it is unable to control. As an international business a significant proportion of the Group’s products require registration from national or federal regulatory bodies prior to being offered for sale. The majority of our major product lines have FDA approval in the US and we are therefore subject to their audit and inspection of our manufacturing facilities. There is no guarantee that any product developed by the Group will obtain and maintain national registration or that the Group will always pass regulatory audit of its manufacturing processes. Failure to do so could have severe consequences upon the Group’s ability to sell products in the relevant country. The majority of distributors, including the most significant, are well established and their relationship with the Group spans many years. Credit levels and cash collection is closely monitored by management, and issues are quickly elevated both within the Group and with the distributor. The Group monitors currency exposures on an on- going basis and enters into forward currency arrangements where considered appropriate to mitigate the risk of material adverse movements in exchange rates impacting upon the business. Euro and US Dollar cash balances are monitored regularly and spot rate sales into sterling are conducted when significant currency deposits have accumulated. The accounting policy for foreign exchange is disclosed in accountancy policy 1d. The Group has a dedicated Quality department which assists product development teams with support as required to minimise the risk of regulatory approval not being obtained on new products and ensures that the Group operates processes and procedures necessary to maintain relevant regulatory approvals. Whilst there is no guarantee that this will be sufficient, the Group has invested in people with the appropriate experience and skills in this area which mitigates this risk significantly. 8 Surgical Innovations Group PLC Annual Report and Accounts 2016 Directors’ Report Going concern The Directors have prepared forecasts for the period to March 2018, which demonstrate a positive cashflow. The Group have access to banking facilities, which comprise of a committed £1.3m revolving credit facility. Hire purchase agreements are utilised where required. The commitment of the revolving credit facility of £1.3m may be used towards meeting the Group’s general working capital and other commitments. It is subject to compliance with financial covenants which measure the ratio of cashflow to debt service and EBITDA starting quarterly from December 2016. Based on the forecasts, the Board has a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. The Board has also concluded that there are no material uncertainties and that the going concern basis should be adopted in preparing these financial statements. Directors’ responsibilities statement The directors are responsible for preparing the Annual Report, the Directors’ Report and the group and parent company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare group and parent company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; • • make judgements and estimates that are reasonable and prudent; • for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; for the parent Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements • The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Auditor KPMG LLP was appointed as auditor at the AGM in June 2016 and a resolution for their re-appointment as independent auditor will be proposed at the 2017 AGM. By order of the Board Charmaine Day Company Secretary 14 March 2017 9 Surgical Innovations Group PLC Annual Report and Accounts 2016 Independent auditor’s report to the members of Surgical Innovations Group Plc We have audited the financial statements of Surgical Innovations Group plc for the year ended 31 December 2016 set out in pages 11 to 40. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 9, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2016 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; the parent company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice; the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. • • • Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year is consistent with the financial statements. Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic report and the Directors’ report: • we have not identified material misstatements in those reports; and • in our opinion, those reports have been prepared in accordance with the Companies Act 2006. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or • • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Matthew Wilcox (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 1 Sovereign Square Sovereign Street Leeds LS1 4DA 14 March 2017 10 Surgical Innovations Group PLC Annual Report and Accounts 2016 Consolidated statement of comprehensive income For the year ended 31 December 2016 Revenue Cost of sales Gross profit Other operating expenses Adjusted EBITDA Exceptional items Amortisation of intangible assets Depreciation of tangible assets Operating profit/(loss) Finance costs Finance income Profit/(loss) before taxation Taxation credit Profit/(loss) and total comprehensive deficit Profit/(loss) per share, total and continuing Basic Diluted Note 2 3 3 5 6 7 8 8 2016 £’000 2015 £’000 6,089 5,468 (4,029) (4,704) 2,060 764 (1,591) (2,739) 1,408 242 - (1,290) (429) (510) (426) (501) 469 (1,975) (192) (153) 1 3 278 (2,125) 438 92 716 (2,033) 0.15p (0.42)p 0.14p (0.42)p The Consolidated statement of comprehensive income above relates to continuing operations. Adjusted EBITDA is defined as earnings before interest, taxation, depreciation, amortisation and exceptional items. 11 Surgical Innovations Group PLC Annual Report and Accounts 2016 Consolidated statement of changes in equity For the year ended 31 December 2016 Balance as at 1 January 2015 Employee share-based payment options Equity placing for cash proceeds Total – transactions with owners Loss and total comprehensive income for the period Balance as at 31 December 2015 Employee share-based payment Equity issues Total – transactions with owners Profit and total comprehensive income for the period Share Capital £’000 Share Premium £’000 Capital Reserve £’000 Retained earnings £’000 Total £’000 4,851 1,634 329 (695) 6,119 - 12 12 - - 7 7 - - - - - (175) (175) - 19 (175) (156) (2,033) (2,033) 4,863 1,641 329 (2,903) 3,930 - 471 471 - - 698 698 - - - - - 23 23 - 1,169 23 1,192 716 716 Balance as at 31 December 2016 5,334 2,339 329 (2,164) 5,838 12 Surgical Innovations Group PLC Annual Report and Accounts 2016 Consolidated balance sheet At 31 December 2016 Assets Non-current assets Property, plant and equipment Intangible assets Current assets Inventories Trade receivables Other current assets Cash at bank and in hand Total assets Equity and liabilities Equity attributable to equity holders of the parent company Share capital Share premium account Capital reserve Retained earnings Total equity Non-current liabilities Borrowings Obligations under finance leases Deferred tax liabilities Current liabilities Trade and other payables Obligations under finance leases Accruals Total liabilities Total equity and liabilities Note 2016 £’000 2015 £’000 9 10 11 12 12 15 16 13 14 7 14 1,579 1,597 3,176 1,496 1,098 289 775 3,658 6,834 1,827 1,361 3,188 1,916 1,301 389 976 4,582 7,770 5,334 2,339 329 4,863 1,641 329 (2,164) (2,903) 5,838 3,930 - 8 2,982 62 - - 8 3,044 337 45 606 408 196 192 988 796 996 3,840 6,834 7,770 The accompanying accounting policies and notes form part of the financial statements. The consolidated financial statements on pages 11 to 34 were approved by the Board of Directors on 14 March 2017 and were signed on its behalf by: N F Rogers Director M Ross Director Company registered number: 2298163 13 Surgical Innovations Group PLC Annual Report and Accounts 2016 Consolidated cash flow statement For the year ended 31 December 2016 Cash flows from operating activities Operating profit/(loss) Adjustments for: Non-cash exceptional items Depreciation of property, plant and equipment Amortisation of intangible assets Share-based payment charge Grant income Foreign exchange Decrease in inventories Decrease in current receivables Decrease in payables Cash generated from operations Taxation received Interest paid Net cash generated from operating activities Payments to acquire property, plant and equipment Acquisition of intangible assets Acquisition of Surgical Dynamics assets and laparoscopic business Net cash used in investment activities Conversion of Loan Notes 2017 Repayment bank loan Cash received from issue of shares Repayment of obligations under finance leases Net cash used in financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effective exchange rate fluctuations on cash held Cash and cash equivalents at end of year 2016 £’000 2015 £’000 469 (1,975) - 1,152 510 429 23 (10) 65 797 178 (61) 2,400 531 (86) 501 426 - (50) 6 1,586 472 (538) 1,580 - (68) 2,845 1,512 (161) (440) (182) (783) (172) (275) - (447) - 500 (2,000) (1,000) - (198) (2,198) (136) 976 (65) 775 19 (280) (761) 304 678 (6) 976 14 Surgical Innovations Group PLC Annual Report and Accounts 2016 Notes to the consolidated financial statements 1. Group accounting policies under IFRS (a) Basis of preparation These financial statements have been prepared on the basis of the IFRS accounting policies set out below. The financial statements have been prepared in accordance with IFRS as adopted for use by the European Union, including IFRIC interpretations, and in line with those provisions of the Companies Act 2006 applicable to companies reporting under IFRS. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The financial statements have been prepared under the historical cost convention, are presented in Sterling and are rounded to the nearest thousand. The Directors have considered the available cash resources of the Group and its current forecasts and are satisfied that the Group has adequate resources to continue in operational existence and that there are no material uncertainties casting doubt over the going concern status of the Group. Accordingly, the financial statements are prepared on a going concern basis. Further details of the Directors’ assessment are provided in the Directors’ report on page 9. The following Adopted IFRSs have been issued but have not been applied by the Group in these financial statements. Their adoption is not expected to have a material effect on the financial statements: • • • IFRS 9 Financial Instruments (effective date 1 January 2018). IFRS 15 Revenue from Contract with Customers (effective date 1 January 2018). IFRS 16 Leases (effective date 1 January 2019). (b) Consolidation Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (c) Business combinations All business combinations are accounted for by applying the acquisition method. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. The Group measures goodwill at the acquisition date as: the fair value of the consideration transferred; less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. Costs related to the acquisition are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. Any subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. 15 Surgical Innovations Group PLC Annual Report and Accounts 2016 (d) Foreign currency translation Transactions and balances Foreign currency transactions are translated into the functional currency of Sterling using the exchange rates prevailing at the dates of transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated statement of comprehensive income. (e) Property, plant and equipment Property, plant and equipment are stated at the cost of acquisition less any provision for depreciation. Cost includes expenditure that is directly attributable to the acquisition of the item. The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. The assets residual values, useful lives and depreciation methods are reviewed at each financial year end and adjusted where the expected asset utilisation differs significantly from the depreciation method applied. Depreciation is charged so as to write off the cost of property, plant and equipment less estimated residual value over their estimated useful economic lives at the following rates: Office and computer equipment Plant and machinery Tooling Placed equipment Leasehold improvements – – – – – 10–33% per annum 10% per annum 10–20% per annum 33.3% per annum Over the remaining term of the lease Placed equipment relates to equipment placed in clinical settings to generate a stream of recurring revenue from the single use element of the equipment. (f) Intangible assets and goodwill Goodwill Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the investee. Other intangible assets Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred. Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and accumulated impairment losses. Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: Patents and trademarks Capitalised development costs Single use product knowledge transfer - - - 5 years 5 years 5 years Research and development Expenditure on research activities is recognised as an expense in the period in which it is incurred. Development expenditure arising from the Group’s development activities is capitalised and amortised over the life of the product only if the Group can demonstrate the following: • • • • • the technical feasibility of completing the intangible asset so it will be available for use or sale; the intention to complete the intangible asset and use or sell it; the ability to use or sell the intangible asset; that it is probable that the asset created will generate future economic benefits; there is the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and the development cost of the asset can be measured reliably. • 16 Surgical Innovations Group PLC Annual Report and Accounts 2016 Where no intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Capitalised development costs are amortised over the life of the product within other operating expenses, which is usually between five and ten years. (g) Impairment of non-financial assets Impairment reviews are carried out on capitalised development assets annually and where there is a specific indicator of impairment. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. (h) Inventories Inventories are stated at the lower of cost (using weighted average) and net realisable value. Cost is the purchase cost, including transport, for raw materials, together with a proportion of manufacturing overheads based on normal levels of activity, for finished goods. Net realisable value is based on estimated normal selling price, less further costs expected to be incurred to completion and sale. Impairment provisions are made for obsolete, slow moving or defective items where appropriate. Such provisions are based upon established future sales and historical experience. (i) Trade receivables Trade receivables are recognised initially at fair value and thereafter at amortised costs less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The amount of the loss is recognised in the Consolidated statement of comprehensive income, as are subsequent recoveries of amounts previously written off. (j) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held on call at banks and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. (k) Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate. (l) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from proceeds. (m) Exceptional items Exceptional items are costs or group of costs which are non-recurring in nature which the Directors believe should be separately identified in the financial statements to enable the reader to properly understand the underlying trading performance of the business. (n) Income tax The charge for current tax is based on the results for the period as adjusted for items which are non-assessable or disallowed and any adjustment to tax payable in respect of previous years. It is calculated using rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit. In principle, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill (or negative goodwill) or from the initial recognition (other than in business combination) of other assets and liabilities in a transaction which affects neither the taxable profit nor the accounting profit. 17 Surgical Innovations Group PLC Annual Report and Accounts 2016 Tax benefits are not recognised unless the tax positions are probable of being sustained. Once considered to be probable, management reviews each material tax benefit to assess whether a deferred tax asset should be recognised, based on the ability under tax statute to recover those tax losses and through the assessment of probable future taxable profits against which those tax losses can be recovered. Deferred tax is calculated at the rates that are enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the Consolidated statement of comprehensive income, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Information as to the calculation of the income tax expense is included in note 7. (o) Employee benefits Pension obligations The Group provides pension benefits to its employees through contributions to defined contribution Group personal pension policies. The amounts charged to the Consolidated statement of comprehensive income are the contributions payable in the period. Share-based compensation The Group issues equity settled share options to Directors and employees which are measured at fair value and recognised as an expense in the Consolidated statement of comprehensive income with a corresponding increase in profit and loss reserve. The fair value of the employee services received in exchange for the grant of the options is treated as remuneration in respect of the individual. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted. The fair values of these payments are measured at the dates of grant and are recognised over the period during which employees become unconditionally entitled to the awards which is usually the vesting period. At each balance sheet date, the Group revises its estimate of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the Consolidated statement of comprehensive income, with a corresponding adjustment to retained earnings. (p) Borrowings Borrowings, which comprised bank loans and potentially convertible fixed rate unsecured loan notes (“Loan Notes”), are initially recognised at fair value, net of transaction costs incurred. Borrowings were subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Loan Notes, which are potentially convertible subject to shareholder approval, are classified as liabilities. Fees paid on the arrangement of the loan facilities and revolving credit facilities are recognised as transaction costs over the life of the agreement. (q) Income recognition Revenue - Sales of goods SI brand/OEM Revenue is the total amount receivable by the Group for the supply of goods and services, excluding VAT and trade discounts. Revenue is recorded for the sale of goods when the significant risks and rewards of ownership are transferred to customers. Under our standard terms and conditions of sale, this arises when goods are despatched to the customer. Revenue - Provision of services Precision Engineering Project based revenue is accounted for using the percentage of completion method, estimated contract revenues are accrued based on the ratio of costs incurred to date, to the total estimated costs, taking into account the level of physical completion. Interest income Interest income is recognised using the effective interest rate method. 18 Surgical Innovations Group PLC Annual Report and Accounts 2016 Other income Government grants are recognised in the Consolidated statement of comprehensive income so as to match them with the expenditure towards which they are intended to contribute. (r) Leases Where the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a finance lease. The asset is recorded in the balance sheet at fair value as property, plant and equipment and is depreciated over its estimated useful life or the term of the lease, whichever is the shorter. Future instalments under such leases, net of finance charges, are included in liabilities. Rentals under operating leases are charged on a straight-line basis over the lease term. Lease incentives, comprising rent free periods, are amortised over the period of the lease. (s) Significant management judgement in applying accounting policies The following are significant management judgements made in applying the accounting policies of the Group that have the most significant effect on the financial statements. Critical estimation uncertainties are described in note (t). Internally generated research and development assets Management monitors the progress of internal research and development projects using the accounting system and through timesheet records. Judgement is required in determining and distinguishing the research phase from the development phase. Research costs are incurred during the concept phase of the project which is fully expensed in the period. Prior to the commencement of the product development phase, it is Group policy that capital expenditure approval is obtained from the appropriate level; this enables the Group to ensure that projects are financially viable after taking account of the cost of development. Costs incurred subsequent to this are recognised as an intangible asset when all relevant criteria are met. Management performs an impairment review of capitalised development assets annually. The impairment review includes a significant degree of judgement, in particular determining the revenue streams relevant to a particular project. Many of the Group’s products operate in conjunction with each other, particularly where the Resposable® concept applies. Accordingly, management aggregates together certain cash generating units as the product’s revenues are linked and certain development assets when looking at overall recoverability of the costs held in the consolidated balance sheet. Capitalised development costs at 31 December 2016 total £1,372,000 and any further impairment identified in future periods could have a material impact on the Group’s results. (t) Estimation uncertainty When preparing the financial statements management determines a number of estimates and assumptions about recognition and measurement of assets, liabilities, income and expenses. The actual results may differ from the estimates and assumptions made by the Group and will seldom equal the estimated results. Information about significant estimates and assumptions that have the most significant effect on recognition and measurement of assets, liabilities, income and expenses are discussed below. Impairment As described in note (s) previously, an impairment test is performed annually to assess the carrying amount of product development assets held in the Group’s balance sheet. The impairment test performed compared the amount at which the asset is carried with the recoverable amount of the asset. To determine the recoverable amount, the Group estimates the total cashflows associated with the future revenue stream of the product (or group of products) and the associated margin, and discounts this to present value at the Group’s weighted average cost of capital (WACC), adjusted to product and related risks. In the process of estimating future revenue and margin the Group makes assumptions about future operating results and these estimates may vary significantly with actual results. Whilst a reduction of 10% in projected gross margins and revenue streams would not give rise to any further impairment, it should be noted that the success of individual products will also have a bearing on any future test. Useful lives of depreciable assets The Group reviews the useful life of depreciable assets at each reporting date. At 31 December 2016 the Directors assessed that the useful lives represent the expected utilisation of the assets by the Group. Actual results, however, may vary due to technical obsolescence or changing customer requirements particularly for plant, machinery and tooling. 19 Surgical Innovations Group PLC Annual Report and Accounts 2016 Inventories Inventories are measured at the lower of cost and net realisable value. However, the Group is exposed to inventory obsolescence caused through changing customer requirements or technological changes. Management perform a comprehensive review of inventory on a line-by-line basis and recorded the provision based on the age of inventory. Trade receivables The Group provides, in certain agreed situations, products on extended credit terms in order to establish a presence in an export market. The Directors constantly review the likelihood of realisation of these receivables and make provision based on their best estimates of when the full value of the receivable will not be recoverable. As disclosed in note 12, the top three customers in trade receivables totaled, as at the 31 December 2016, £591,405 which highlights that a major customer failing could have a material impact on the Group. However none of these three top customers are on extended credit terms. A material impact on the Group. However none of these three top customers are on extended credit terms. (u) Equity Equity includes the elements listed below: • • “Share capital” represents the nominal value of equity shares; “Share premium” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue; “Capital reserve” represents the excess over nominal value of the fair value consideration attributed to equity shares issued in part settlement for subsidiary company shares acquired; and “Retained earnings” represents the accumulated profits and losses of the Group. • • 20 Surgical Innovations Group PLC Annual Report and Accounts 2016 2. Segmental reporting Information reported to the Board and for the purpose of assessing performance and making investment decisions is organised into three operating segments. The Group’s operating segments under IFRS 8 are as follows: SI Brand OEM PE – – – the research, development, manufacture and distribution of SI branded minimally invasive devices the research, development, manufacture and distribution of minimally invasive devic- es for third party medical device companies through either own label or co-branding (Precision Engineering formerly Industrial), the research, development, manufacture and sale of minimally invasive technology products for precision engineering appli- cations The measure of profit or loss for each reportable segment is gross margin less amortisation of product development costs. Assets and working capital are monitored on a Group basis, with no separate disclosure of asset by segment made in the management accounts, and hence no separate asset disclosure is provided here. The following segmental analysis has been produced to provide a reconciliation between the information used by the chief operating decision maker within the business and the information as it is presented under IFRS. For the year ended 31 December 2016 Revenue Result Segment result Unallocated expenses Profit from operations Finance income Finance costs Profit before taxation Tax credit Loss for the year SI Brand £’000 OEM £’000 PE £’000 Total £’000 4,664 1,219 206 6,089 1,210 285 136 1,631 (1,162) 469 1 (192) 278 438 716 Included within the segment/operating results are the following significant non-cash items: For the year ended 31 December 2016 Amortisation of intangible assets SI Brand £’000 304 OEM £’000 125 PE £’000 - Total £’000 429 Unallocated expenses for 2016 include sales and marketing costs (£253,000), research and development costs (£478,000) and central overheads (£415,000). For the year ended 31 December 2015 Revenue Result Segment result Unallocated expenses Profit from operations Finance income Finance costs Profit before taxation Tax credit Loss for the year SI Brand £’000 OEM £’000 PE £’000 Total £’000 4,175 1,243 50 5,468 282 6 50 338 (2,313) (1,975) 3 (153) (2,125) 92 (2,033) Included within the segment/operating results are the following significant non-cash items: For the year ended 31 December 2015 Amortisation of intangible assets SI Brand £’000 282 OEM £’000 144 PE £’000 - Total £’000 426 Unallocated expenses for 2015 include exceptional items (£1,290,000), sales and marketing costs (£222,000), research and development costs (£541,000) and central overheads (£260,000). 21 Surgical Innovations Group PLC Annual Report and Accounts 2016 Geographical analysis of revenues United Kingdom Europe US Rest of World 2016 £’000 1,920 1,287 1,876 1,006 6,089 2015 £’000 1,922 1,286 1,539 721 5,468 Revenues are allocated geographically on the basis of where revenues were received from and not from the ultimate final destination of use. During 2016 £1,235,000 (20.3%) of the Group’s revenue depended on one customer in the SI Brand segment (2015: £1,140,000 (20.8%)). Sales of goods during 2016 were £5,883,000, with the exception of sales relating to services in the UK for £206,000. 3. Operating profit / (loss) The profit for the year is stated after charging: Depreciation of owned assets Depreciation of assets held under finance lease Amortisation of capitalised development costs Research and development costs – non capitalised expenditure Foreign exchange losses Auditor’s remuneration: – fees payable to the Company’s auditor for the audit of the Company’s annual financial statements – fees payable to the Company’s auditor for the audit of the subsidiary undertakings 2016 £’000 444 66 429 478 (79) 6 27 2015 £’000 353 148 426 541 (16) 5 25 – fees payable to the Company’s auditor for the non audit fees relating to tax services 18 8 Operating lease rentals: – land and buildings Exceptional items (all within Other operating expenses): – Impairment of intangible assets - development costs – Additional stock provisions – Impairment of all costs incurred in connection with RGF project – Provisions recorded against short term trade debtors – Provisions recorded against long term trade debtors – Restructuring costs – Impairment of Fixed Assets – Share based payment credit Exceptional items for 2016: nil, (2015: £1.290m) Other operating expenses comprised: Distribution costs Administrative expenses Other expenses (including exceptional items) 153 152 - - - 487 802 8 - (197) - - - - 147 141 77 (175) 2016 £’000 253 415 923 1,591 2015 £’000 222 260 2,257 2,739 22 Surgical Innovations Group PLC Annual Report and Accounts 2016 4. Employees and Directors’ emoluments The average monthly number of employees (including Executive Directors) employed by the Group during the year was as follows: Directors Production Development Administration The costs incurred in respect of these employees were: Wages and salaries Social security costs Pension costs Directors’ emoluments Details of Directors’ emoluments for the year are as follows: 2016 Number 2015 Number 2 36 10 7 55 1 30 10 8 49 2016 £’000 1,427 118 41 2015 £’000 1,248 112 48 1,586 1,408 Executive M Ross1 N F Rogers2 M R Thornton3 Non-executive M J McMahon4 P Hardy4 A Taylor4 Total Salary and fees 2016 £’000 Bonus 2016 £’000 Benefits 2016 £’000 Total emoluments 2016 £’000 Total emoluments 2015 £’000 Pension contributions 2016 £’000 Pension contributions 2015 £’000 80 59 - 20 20 20 85 2 - - - - - 167 59 - 20 20 20 50 25 60 - - - 199 85 2 286 135 4 - - - - - 4 2 - 3 - - - 5 1. 2. 3. 4. M Ross has elected to take 50% of her bonus in shares. N F Rogers was appointed as Executive Chairman from 28 October 2015; £27,500 of the 2016 remuneration noted above was satisfied by shares.. M R Thornton resigned from the Group on 5th August 2015 The Non-executive directors fees were satisfied in shares. Benefits received consist of the provision of motor cars and private health insurance. Pension contributions represent payments made to defined contribution schemes. Non-executive Directors are not entitled to retirement benefits. Remuneration of the Non-executive Directors is determined by the Board. At 31 December 2016, £9,800 (2015: £9,800) was owed to the Company by M J McMahon. 23 Surgical Innovations Group PLC Annual Report and Accounts 2016 Directors’ share options Details of the share options held by Directors serving at 31 December 2016 are as follows: At 1January 2016 Exercised during year Lapsed during the year At 31 December 2016 Option price Date granted M Ross 4,750,000 - - 1.575p December 20151 1. Share options are exercisable between three and ten years from the date of the grant. The market price of the Company’s shares at the end of the financial year was 4.25p (2015: 1.625p) and the range of market prices during the year was between 1.23p (2015: 1.1p) and 4.25p (2015: 2.5p). Key management including Non-executive Directors: Salaries Social security costs Pension costs Share-based payments Redundancy Total 5. Finance costs On finance leases On net borrowing Total 6. Finance income Interest received 2016 £’000 194 21 10 8 - 233 2016 £’000 7 185 192 2015 £’000 148 21 9 - 40 218 2015 £’000 18 135 153 2016 £’000 1 2015 £’000 3 24 Surgical Innovations Group PLC Annual Report and Accounts 2016 7. Taxation Current tax credit Deferred tax credit / (charge) Total tax credit 2016 £’000 (438) - (438) 2015 £’000 (92) - (92) Factors affecting the tax charge for the year The taxation assessed for the year is lower than the standard rate of Corporation tax in the UK at 20% (2015: 20%). The differences are explained as follows: Profit/(loss) on ordinary activities before taxation Corporation tax at standard rate of 20% (2015: 20%) Effects of: Net impact of research and development enhanced expenditure Expenses not tax deductible Other movements on intangible assets and accelerated capital allowances Deductions on exercise of share options Trading losses not recognised Total tax credit for the year Deferred taxation The movement in the deferred taxation (liability)/asset during the year was: Balance brought forward-(liability)/asset Consolidated statement of comprehensive income movement during the year Balance carried forward-(liability)/asset The deferred taxation calculated in the financial statements at 17% (2015: 18%) is set out below: Trade losses Fixed asset timing differences The following is the analysis of unprovided deferred tax balances: Deferred tax assets Deferred tax liabilities Net unrecognised deferred tax assets 2016 £’000 2015 £’000 278 (2,125) 56 (425) (593) (257) (1) 39 - 61 (55) 145 - 500 (438) (92) 2016 £’000 2015 £’000 - - - - - - 2016 £’000 2015 £’000 (112) (120) 112 120 - - 2016 £’000 3,573 - 3,573 2015 £’000 4,180 - 4,180 At the balance sheet date, the Group has unused tax losses of £21.6 million (2015: £21.5 million) available for offset against certain future profits. The timing differences in fixed assets has given rise to a deferred tax liability of £112,000 (2015 DTL: £120,000) in addition a deferred tax asset relating to brought forward losses has been used to offset this liability. No deferred tax asset has been recognised in respect of the remaining £21.0 million (2015: £20.3 million). 25 Surgical Innovations Group PLC Annual Report and Accounts 2016 8. Earnings per ordinary share Basic earnings per ordinary share The calculation of basic earnings per ordinary share for the year ended 31 December 2016 was based upon the profit attributable to ordinary shareholders of £716,000 (2015: loss of £2,033,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2016 of 487,924,227 (2015: 485,070,920). Diluted earnings per ordinary share The calculation of diluted earnings per ordinary share for the year ended 31 December 2016 was based upon the profit attributable to ordinary shareholders of £716,000 (2015: loss of £2,033,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2016 of 494,001,073 (2015: 485,070,920). No. of shares used in calculation of earnings per ordinary share (’000s) Basic earnings per share Dilutive effect of unexercised share options Diluted earnings per share 2016 No. of shares 2015 No. of shares 487,924 485,071 6,077 - 494,001 485,071 26 Surgical Innovations Group PLC Annual Report and Accounts 2016 9. Property, plant and equipment Cost At 1 January 2015 Additions At 1 January 2016 Additions At 31 December 2016 Accumulated depreciation At 1 January 2015 Charge for the year Impairment On disposals At 1 January 2016 Charge for the year Impairment On disposals At 31 December 2016 Net Book amount At 31 December 2016 At 31 December 2015 Tooling £’000 1,258 72 1,330 132 1,462 980 81 77 - 1,138 80 - - 1,218 Office and computer equipment £’000 Placed equipment £’000 Improvements to leasehold property £’000 Plant and machinery £’000 3,490 25 3,515 938 54 992 435 21 456 94 36 - 3,609 1,028 456 Total £’000 6,487 172 6,659 262 6,921 366 - 366 - 366 1,808 303 - - 2,111 300 - - 2,411 884 42 - - 926 49 - - 975 345 37 - - 382 42 - - 424 237 4,254 38 - - 501 77 - 275 4,832 39 - - 510 - - 314 5,342 244 192 1,198 1,404 53 66 32 74 52 91 1,579 1,827 The fair value of the related laparoscopic instrument assets acquired from Surgical Dynamics Ltd amounted to £100,000 of which £87,000 related to Plant & Machinery and £13,000 of Tooling. Leased plant and equipment The Group leases plant and machinery under a number of finance lease arrangements. The carrying amount and depreciation charge for such assets are disclosed below: Plant and machinery Net book value Depreciation charge for the year Security 2016 £’000 2015 £’000 339 66 829 148 At 31 December 2016 and at 31 December 2015, the assets of the Group are subject to a fixed and floating charge debenture in favour of the Group’s banking facilities. At the 31 December 2016 there was no drawdown on the rolling credit facility agreement therefore no liability was held at this point in time. 27 Surgical Innovations Group PLC Annual Report and Accounts 2016 10. Intangible assets Cost At 1 January 2015 Additions At 1 January 2016 Additions At 31 December 2016 Accumulated amortisation At 1 January 2015 Charge for the year Impairment provision At 1 January 2016 Charge for the year Impairment provision At 31 December 2016 Carrying amount At 31 December 2016 At 31 December 2015 Capitalised development costs £’000 Single use product knowledge transfer £’000 11,605 275 11,880 440 12,320 (9,606) (426) (487) (10,519) (429) - (10,948) - - - 225 225 - - - - - - - Total £’000 11,605 275 11,880 665 12,545 (9,606) (426) (487) (10,519) (429) - (10,948) 1,372 1,361 225 - 1,597 1,361 Capitalised development costs represent expenditure incurred in developing new products that fulfil the requirements of IAS 38. These costs are amortised over the future commercial life of the product, commencing on the sale of the first commercial item, up to a maximum product life cycle of ten years, and taking account of expected market conditions and penetration. There was no impairment charge for 2016 (2015: £487,000). The impairment charge recorded in the prior year financial statements was determined by comparing value in use with the carrying amount, as there is no reliable assessment of fair value less cost to sell available. Value in use was determined by applying a pre-tax discount rate of 15% to anticipated revenue streams. Single use product knowledge transfer relates to the acquisition of the single use laparoscopic instrumentmentation products of Surgical Dynamics Ltd. 11. Inventories Raw materials and work in progress Finished goods Net Inventory 2016 £’000 1,021 475 2015 £’000 994 922 1,496 1,916 Included in the analysis above are impairment provisions against inventory amounting to £1,651,000 (2015: £2,023,000), which represents 52.5% (2015: 51.4%) of gross inventory In 2016 a total of £4,047,000 of inventories was included in profit and loss as an expense within cost of sales (2015: £4,704,000). Cost of sales included an amount of £163,000 resulting from the write down of inventories (2015: £159,000). There was no exceptional charge in the Administrative expenses relating to relating to the write off of specific inventories for which no future sale is likely and also the creation of a provision for all other inventory based upon product age (2015: £802,000). Inventories are pledged as securities for bank facilities. 28 Surgical Innovations Group PLC Annual Report and Accounts 2016 12. Trade and other receivables Falling due in less than one year Trade receivables Prepayments and accrued income Corporation Tax recoverable Other debtors 2016 £’000 1,098 216 - 73 2015 £’000 1,301 189 - 200 1,387 1,690 Of the current trade receivables, £591,405 relates to the top three customers (2015: £711,731). All of the Group’s trade and other receivables have been reviewed for indicators of impairment. The movement of the impairment provision is shown below: Trade receivable impairment provision at the beginning of the year Charge for the year Reversals Trade receivable impairment provision at the end of the year 2016 £’000 130 4 (15) 119 2015 £’000 375 - (245) 130 The carrying value of trade receivables is considered a reasonable approximation to fair value. In addition some of the unimpaired trade receivables are past due at the reporting date. The age of financial assets past due but not impaired is shown below: Not more than three months More than three months but not more than six months More than six months but not more than one year More than one year 13. Borrowings Bank loan Loan notes 2017 Bank loan 2016 £’000 164 2015 £’000 91 4 - - 6 - 2 2016 £’000 - - - 2015 £’000 1,982 1,000 2,982 The sterling bank loan provided by Yorkshire Bank on 17 November 2014, which was due to be repaid November 2017 was subject to quarterly payments of £0.1m, totaling £0.3m in the year. On the 22 December 2016 the remaining balance of the term loan of £1.70m was repaid from available cash resources, and the bank has made available a Revolving Credit Facility (RCF) of up to £1.30m for working capital and other purposes until 31 March 2020. The RCF is subject to compliance with financial covenants which measure cash flow to debt service and EBITDA. If the bank loan is drawdown the rate of interest applicable to each loan for its interest period will be LIBOR plus 2.8% per annum and it will be secured by a fixed and floating charge over the assets of the Group. At the 31 December 2016, no amount was drawndown. Loan notes 2017 On the 21 December 2016 all of the outstanding unsecured fixed rate convertible loan notes (“Loan Notes”) amounting to £1.00m, together with accrued interest of £0.11m were converted into 44,259,178 ordinary shares of 1p each at a conversion price of 2.5p per share. The Loan Notes were originally created on 17 November 2014 and were repayable on 17 November 2017 unless converted into equity at an earlier date. 29 Surgical Innovations Group PLC Annual Report and Accounts 2016 14. Financial instruments The Group is exposed to market risk through its use of financial instruments. The Group’s risk management is co- ordinated by the Directors who focus actively on securing the Group’s short to medium-term cash flows through regular review of all the operating activities of the business. Long-term financial investments are managed to generate lasting returns. The Group does not actively engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Group is exposed are described in the following sections. Foreign currency sensitivity Exposures to currency exchange rates arise from the Group’s overseas sales and purchases, most of which are denominated in Euros and Dollars. To mitigate the Group’s exposure to foreign currency risk, cash flows in Euros and Dollars are monitored on an ongoing basis. Foreign currency denominated financial assets and liabilities are set out below: 2016 €’000 2015 €’000 2016 $’000 2015 $’000 Financial assets Financial liabilities Short-term exposure - (1) (1) 49 - 49 454 (11) 443 607 - 607 The Group has exposure to the movements in the exchange rates in the Euro and Dollar at 31 December 2016. An analysis of the effect of a reasonable possible movement in exchange rates shows that a movement of 5% in the exchange rate could result in foreign currency gains or losses of £nil (2015: £2,000) against the Euro and £19,000 (2015: £22,000) against the Dollar. The Group gives consideration to the use of forward currency contracts to reduce foreign currency exposure. Credit risk analysis The Group’s exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date, which are set out below: Trade and other receivables 2016 £’000 1,098 1,098 2015 £’000 1,301 1,301 The Group continually monitors defaults of customers and other counterparties and incorporates this information into its credit risk controls. Management considers that all of the above financial assets that are not impaired for each of the reporting dates under review are of good credit quality, including those that are past due. In respect of trade and other receivables that are not impaired, the Group does have some credit risk through customer concentration as disclosed in note 12. Liquidity risk analysis The Group manages its liquidity needs by carefully monitoring all scheduled cash outflows. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis, as well as on the basis of a rolling 13- week projection. Longer-term needs are monitored as part of the Group’s regular rolling monthly re-forecasting process. Funding for long-term liquidity is additionally secured by an adequate amount of committed credit both through asset finance facilities and loans. Further analysis of long-term borrowings is provided in note 13. The Group’s liabilities have contractual cash flows which are summarised below: 31 December 2016 Finance lease obligations Trade and other payables Current Non- Current Within 6 Months £’000 23 318 341 Within 6 -12 Months £’000 22 19 41 Over 12 months £’000 8 - 8 30 Surgical Innovations Group PLC Annual Report and Accounts 2016 14. Financial instruments (continued) Current Non- Current 31 December 2015 Finance lease obligations Trade and other payables Bank loans Loan notes 2017 Maturity profile of borrowings Gross lease payments not later than one year Later than one year but not more than five years Future finance charges Present value of finance lease liabilities Summary of financial assets and liabilities by category Current assets Cash at bank and in hand Trade and other receivables Current liabilities Trade payables: financial liabilities measured at amortised cost Other short-term financial liabilities measured at amortised cost Non-current liabilities Borrowings measured at amortised cost Other non-current liabilities measured at amortised cost Net financial assets and liabilities Fair value Within 6 Months £’000 130 408 245 - 783 Within 6 -12 Months £’000 85 - 235 Over 12 months £’000 43 - 1,627 - 1,175 320 2,845 2016 £’000 39 16 (2) 53 2015 £’000 212 55 (9) 258 2016 £’000 2015 £’000 775 1,098 1,873 976 1,301 2,277 337 45 408 196 382 604 - 2,982 8 62 8 3,044 1,483 (1,371) Management is of the opinion that the carrying value of financial assets and liabilities equates to their fair value. Capital management The Group’s capital management objectives are: • • to ensure its ability to continue as a going concern; and to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk. The Group manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may issue new shares or sell assets to reduce debt. Historically, the Group has primarily been funded through cash reserves and hire purchase financing and accordingly no target for gearing levels has been set. Capital as monitored by the Group for the reporting periods under review is summarised as follows: Total borrowings Less: cash and cash equivalents Net (cash)/debt Total equity Total capital 31 2016 £’000 53 (775) (722) 5,838 5,116 2015 £’000 3,240 (976) 2,264 3,930 6,194 Surgical Innovations Group PLC Annual Report and Accounts 2016 15. Share capital Allotted, called up and fully paid 533,407,756 2016 £’000 2015 £’000 (2015: 486,275,710) ordinary shares of 1p each 5,334 4,863 At 31 December 2016, the following share options were outstanding: Number of shares Exercise dates Exercise in yr Lapsed At 31 December 2016 Option price per 1p share Date from which option may be exercised Date on which option expires - - - - - - - - - - 3,000,000 1,000,000 1.7p November 2009 November 2017 1.5p November 2009 January 2019 800,000 1.7p November 2009 November 2019 (30,000) 680,000 200,000 7.2p 9.0p June 2015 June 2022 June 2015 June 2022 (30,000) 1,100,000 5.1p June 2016 June 2023 (2,000,000) 15,000,000 1.575p December 2018 December 2025 - - 4,999,998 1,000,000 6.9p 5.1p January 2018 January 2023 June 2016 June 2023 At 1 January 2016 3,000,000 1,000,000 800,000 710,000 200,000 1,130,000 17,000,000 4,999,998 1,000,000 Scheme and date of grant Non-executive unapproved November 2007 January 2009 November 2009 Enterprise management June 2012 June 2012 June 2013 December 2015 Other option awards January 2013 June 2013 Share-based payments Share options were granted during prior periods to certain employees, distributors and members of the Clinical Advisory Board. The exercise price of the granted options is equal to market price at grant. For employees, options are conditional upon completing a three year service period from the date of grant. For distributors and members of the Clinical Advisory Board, options are conditional on the completion of appropriate objectives. Movements in the number of share options outstanding and their related weighted average exercise price are as follows: 31 December 2015 At 1 January Exercised Granted Lapsed At 31 December 2016 2015 Average exercise price pence 3.2 - - Options ’000s 29,840 - - Average exercise price pence 4.5 - 1.575 (1.7) (2,030) (4.1) 3.0 27,810 3.2 Options ’000s 17,930 - 17,000 (5,090) 29,840 Out of the 27,779,998 options (2015: 29,839,998), 4,800,000 (2015: 4,800,000) options were exercisable at an average exercise price of 1.7p (2015: 1.7p). The weighted average fair value of options granted in prior periods was determined using the Black-Scholes valuation model. The significant inputs into the model were share price at the date of grant, exercise price as set out above, volatility of 40%, an expected option life varying between three and five years and an annual risk-free interest rate of 2.5%. Volatility was calculated with reference to statistical analysis of the historic daily share price. After taking account of estimated leavers, the total share- based payment charge for the year was £23,000 (2015: credit of £175,000). 32 Surgical Innovations Group PLC Annual Report and Accounts 2016 16. Share premium Balance as at 31 December 2015 Issue of ordinary share capital Balance as at 31 December 2016 Share premium £’000 1,641 698 2,339 Share premium comprises the cumulative difference between the net proceeds and nominal value of the Company’s issued equity share capital. 17. Contingent liabilities and financial commitments These are as follows: (a) Contingent liabilities There were no contingent liabilities at 31 December 2016 (2015: £nil). (b) Operating leases At 31 December 2016 the Group had future aggregate minimum lease payments under non-cancellable operating leases as follows: Within one year One to five years (c) Capital commitments 2016 £’000 175 71 2015 £’000 192 235 At 31 December 2016 the Group had capital commitments totaling £68,000 (2015: £nil). 18. Transactions with related parties The Group have identified a list of related parties and a summary of the transactions during the year, along with outstanding amounts at the balance sheet date is as follows: ACP1 Hardy Transaction Management Ltd2 Amounts invoiced to/(by) the Group 2016 £’000 (270) (20) Amounts payable/ (receivable) 31 December 2016 £’000 (69) - Amounts invoiced to/ (by) the Group 2015 £’000 (267) - Amounts payable/ (receivable) 31 December 2015 £’000 (78) - Transactions with related parties during the current and prior year were as follows: 1. ACP acts as the master distributor for Surgical Innovations in the Far East. During the year Surgical Innovations invoiced ACP £270,000 for products and at 31 December 2016 there was an amount owing to Surgical Innovations of £69,000. Getz Bros. & Co. Inc. is the ultimate beneficial owner of ACP. The registered address is: Aisa Cardiovascular Products (ACP) Unit 2-3, 11F, No 1 Hung To Road Kwun Tong Kowloon Hong kong 2. Director’s fees and advisory fees for P Hardy are paid to Hardy Transactions Management Ltd. The registered address is: Hardy Transaction Management Ltd Suite One Sixth Floor St James House Vicar Lane Sheffield S1 2EX Registered in England & Wales: 04887548 There is no controlling party of Surgical Innovations Group Plc. 33 Surgical Innovations Group PLC Annual Report and Accounts 2016 19. Pensions The Company currently operates a defined contribution Group personal pension plan for the benefit of employees. Company contributions in 2016 were £39,000 (2015: £48,000). 20. Acquisition On the 7th November 2016, the Group acquired the laparoscopic instruments business and related assets of Surgical Dynamics Ltd for a cash consideration of £359,000. As at the year ending 31 December 2016 £182,000 had been paid to Surgical Dynamics, with the remainder of the consideration payable in 2017. Effect of acquisition The acquisition had the following effect on the Company’s assets and liabilities: Assets acquired from Surgical Dynamics Ltd: Plant & Machinery Tooling Inventory Single use knowledge transfer Net identifiable assets Total consideration Goodwill recognised Recognised Fair Value on acquisition £’000 87 13 34 225 359 359 - 34 Surgical Innovations Group PLC Annual Report and Accounts 2016 Company Balance Sheet Company Balance Sheet as at 31 December 2016 Assets Non-Current Assets Investments Current assets Trade receivables Cash at bank Total Assets Equity & Liabilities Equity attributable to equity holders of the company Share Capital Share Premium Account Retained Earnings Total Equity Non-Current Liabilities Loan Notes Current Liabilities Trade & Other payables Total Liabilities Total Equity & Liabilities Notes 2016 £’000 2015 £’000 2 3 6 5 4 1,018 1,018 5,399 344 5,743 6,761 5,334 2,339 (1,047) 6,626 4,779 909 5,688 6,706 4,863 1,641 (867) 5,637 - 1,000 135 135 6,761 79 1,079 6,706 The financial statements on pages 35 to 40 were approved by the Board of Directors on 14 March 2017 and were signed on its behalf by: Melanie Ross Chief Operating Officer Company registered number: 2298163 35 Surgical Innovations Group PLC Annual Report and Accounts 2016 Statement of changes in equity for the year ended 31 December 2016 Balance as at 1 January 2015 Employee share-based payment options1 Exercise of share options Equity placing for cash proceeds Total – transactions with owners Profit and total comprehensive income for the period Balance as at 31 December 2015 Employee share-based payment Equity Issues Total – transactions with owners Loss and total comprehensive deficit for the period Balance as at 31 December 2016 1. Employee shared based payment credit was credited as an Exceptional item in 2015. Share capital £’000 4,851 Share premium £’000 Retained earnings £’000 1,634 (702) Total £’000 5,783 - - 12 12 - 4,863 - 471 471 - - - 7 7 - - 698 698 - (175) (175) - - - 19 (175) (156) 10 23 - 23 10 5,637 23 1,169 1,192 (203) (203) 1,641 (867) 5,334 2,339 (1,047) 6,626 36 Surgical Innovations Group PLC Annual Report and Accounts 2016 Notes to the Company financial statements as at 31 December 2016 1. Accounting policies (a) Basis of preparation These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (“FRS 101”). The amendments to FRS 101 issued in July 2015 and effective immediately have been applied. In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”), but makes amendments where necessary in order to comply with Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure exemptions has been taken. In these financial statements, the company has applied the exemptions available under FRS 101 in respect of the following disclosures • Comparative period reconciliations for share capital; • • Disclosures in respect of transactions with wholly owned subsidiaries ; • • An additional balance sheet for the beginning of the earliest comparative period following the retrospective The effects of new but not yet effective IFRSs; a Cash Flow Statement and related notes; change in accounting policy • Disclosures in respect of the compensation of Key Management Personnel; and • Disclosures of transactions with a management entity that provides key management personnel services to the company. As the consolidated financial statements of Surgical Innovations Group PLC include the equivalent disclosures, the Company has also taken the exemptions under FRS 101 available in respect of the following disclosures • IFRS 2 Share Based Payments in respect of group settled share based payments The Company proposes to continue to adopt the reduced disclosure framework of FRS 101 in its next financial statements. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. The company has adopted the following IFRSs in these financial statements: The definition of a ‘related party’ is extended to include a management entity that provides key management personnel services to the reporting entity, either directly or through a group entity. The financial statements are prepared on the historical cost basis. (b) Investment in subsidiary undertakings The Company’s investment in subsidiary undertakings is stated at cost less any provision for impairment. (c) Share-based transactions Share-based payment arrangements in which the Company receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Company. The grant date fair value of share-based payments awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period in which the employees become unconditionally entitled to the awards. The fair value of the awards granted is measured using an option valuation model, taking into account the terms and conditions upon which the awards were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. 37 Surgical Innovations Group PLC Annual Report and Accounts 2016 (c) Borrowings Borrowings, which comprise potentially convertible fixed rate unsecured loan notes (“Loan Notes”), are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Loan Notes, which are potentially convertible subject to shareholder approval, are classified as liabilities. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. 2. Investments Company Cost At 31 December 2016 and 1 January 2016 Provision for diminution in value At 31 December 2016 and 1 January 2016 Net book value at 31 December 2016 and 1 January 2016 The principal trading subsidiaries of the Group comprise: £’000 1,018 - 1,018 Company Description of shares held Nature of business Country of incorporation and operation Surgical Innovations Limited Ordinary £1 shares Haemocell Limited Ordinary £1 shares Design and manufacture of minimally invasive devices Design and manufacture of autologous blood products Great Britain Great Britain Proportion Held 100% 100% 3. Receivables Prepayments and accrued income Other debtors Amounts due from subsidiary undertakings Amounts due from subsidiary undertakings are unsecured, interest free and repayable on demand. 2016 £’000 9 13 5,377 5,399 2015 £’000 4 13 4,762 4,779 38 Surgical Innovations Group PLC Annual Report and Accounts 2016 4. Current liabilities Accruals and deferred income Other creditors 5. Non-current liabilities Loan notes 2017 Loan notes 2017 2016 £’000 115 20 135 2015 £’000 70 9 79 2016 £’000 - - 2015 £’000 1,000 1,000 On the 21 December 2016 all of the outstanding unsecured fixed rate convertible loan notes (“Loan Notes”) amounting to £1.00m, together with accrued interest of £0.11m were converted into 44,259,178 ordinary shares of 1p each at a conversion price of 2.5p per share. The Loan Notes were originally created on 17 November 2014 and were repayable on 17 November 2017 unless converted into equity at an earlier date. 6. Share capital Allotted, called up and fully paid: 2016 £’000 2015 £’000 533,407,756, ordinary shares of 1p each (2015: 486,275,710) 5,334 4,863 During the year the following ordinary shares of 1p were issued in respect of cash consideration as follows: • • • • • 811,644 issued at 1.825p in lieu of remuneration 905,660 issued at 1.7p in lieu of remuneration 688,421 issued at 2.375p in lieu of remuneration 467,143 issued at 3.5p in lieu of remuneration 44,259,178 issued at a conversion price of 2.5p per share for the loan notes and accrued interest. 39 Surgical Innovations Group PLC Annual Report and Accounts 2016 7. Loss for the financial year of Surgical Innovations Group plc The loss for the financial year dealt with in the financial statements of the holding company, Surgical Innovations Group plc, was £481,000 (2015: a profit of: £10,000). As permitted by Section 408 of the Companies Act 2006, the profit and loss account has not been included in these financial statements. 8. Transactions with related parties The Group have identified a list of related parties and a summary of the transactions during the year, along with outstanding amounts at the balance sheet date is as follows: Amounts invoiced to/(by) the Group 2016 £’000 Amounts payable/ (receivable) 31 December 2016 £’000 Amounts invoiced to (by) the Group 2015 £’000 Amounts payable/ (receivable) 31 December 2015 £’000 Hardy Transaction Management Ltd1 (20) - - - Transactions with related parties during the current and prior year were as follows: 1. Director’s fees and advisory fees for P Hardy are paid to Hardy Transactions Management Ltd. The registered address is: Hardy Transaction Management Ltd Suite One Sixth Floor St James House Vicar Lane Sheffield S1 2EX Registered in England & Wales: 04887548 In these financial statements, the company has applied the exemption available under FRS 101 in respect of the following disclosures. • Disclosures in respect of transactions with wholly owned subsidiaries. 40 Surgical Innovations Group PLC Annual Report and Accounts 2016 Advisers Company Secretary and registered office Charmaine Day Clayton Wood House 6 Clayton Wood Bank Leeds LS16 6QZ Registered number 2298163 Nominated adviser W H Ireland Limited Royal House 28 Sovereign Street Leeds LS1 4BJ Solicitors Nabarro LLP 1 South Quay Victoria Quays Sheffield S2 5SY Auditor KPMG LLP 1 Sovereign Square Sovereign Street Leeds LS1 4DA Registrars Neville Registrars Limited Neville House 18 Laurel Lane Halesowen B63 3DA Bankers Yorkshire Bank 1st Floor 94-96 Briggate Leeds LS1 6NP 41 Surgical Innovations Group PLC Annual Report and Accounts 2016 42 Surgical Innovations Group PLC Annual Report and Accounts 2016 43 Surgical Innovations Group PLC Annual Report and Accounts 2016 44 Surgical Innovations Group PLC Annual Report and Accounts 2016 If you have any questions, please get in touch: si@surginno.co.uk +44(0)113 230 7597 www.sigroupplc.com
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